Old Age Security (OAS) is a taxable monthly benefit paid to eligible Canadian seniors to help boost their retirement income. However, how much OAS you receive depends on your age, income, and how long you have lived in Canada.
But if your annual net income surpasses the OAS income threshold for the year, the Canadian government may deduct a portion or the entirety of your OAS pension. This is commonly known as the Old Age Security (OAS) Pension Recovery Tax or OAS clawback.
So, if your taxable income exceeds $81,761 for 2022, the government initiates a 15% reduction in your OAS amount. This means that for every dollar surpassing the threshold, 15% is deducted from your OAS benefits.
In this blog post, we’ll break down what the OAS clawback is, guide you on calculating it, and provide ten practical strategies to reduce your OAS clawback in Canada.
Key Takeaways
- Old Age Security (OAS) is a Canadian benefit designed to support Canadian seniors above 65 who have lived in Canada as citizens or permanent residents for at least 40 years after age 18.
- Canadian seniors receive up to $713.34 monthly as OAS benefits
- If your income in retirement exceeds the threshold, the government applies a specific tax rate to it
- You can calculate your OAS clawback using your actual income
- It is possible to minimise your OAS clawback
What is OAS Clawback?
The Old Age Security clawback, officially known as the Old Age Security pension recovery tax, comes into play when your net world income exceeds a specific threshold, which is $81,761 for the year 2022. If you find yourself in this situation, you’ll need to repay a portion or the entirety of your OAS pension, and this repayment is deducted monthly as a recovery tax.
If your annual net world income exceeds this threshold amount, you must repay 15% of the difference between your income and the threshold. The repayment amount is based on the discrepancy between your income and the annual threshold.
in addition, if your annual net income exceeds the maximum income recovery threshold, you will stop receiving OAS benefits. The maximum income recovery threshold for the 2022 tax year is $134,626 for seniors aged 65-74 and $137,331 for seniors aged 75-plus.
OAS Clawback Threshold Amounts
Recovery tax period | Income year | Minimum income recovery threshold | Maximum income recovery threshold (age 65-74) |
July 2022 to June 2023 | 2021 | $79,845 | $129,757 |
July 2023 to June 2024 | 2022 | $81,761 | $134,626 |
July 2024 to June 2025 | 2023 | $86,912 | $141,917 |
Source: canada.ca
What is the OAS Clawback Threshold for 2024?
The OAS clawback threshold for 2024 would be the income threshold for the 2022 tax year ($81,761). However, from July 2024 to June 2025, the OAS clawback threshold would be the income threshold for the 2023 tax year ($86,912).
So if you earn at or above the income threshold for the 2022 tax year, your OAS benefits for 2024 will be clawed back by 15% for every dollar that exceeds the minimum income threshold, and if your income surpasses the maximum income threshold, your entire OAS benefit will be clawed back.
What is the Maximum Income to Avoid OAS Clawback?
The maximum income threshold for the 2022 tax year is $134,626 for Canadian seniors between the ages of 65 and 74 and $137,331 for Canadian seniors aged 75 and above.
If your annual net world income exceeds the maximum income threshold in 2024, you will not receive OAS, as the government will claw back your entire OAS benefit.
Is OAS Clawback Based on Family Income?
No, the OAS Pension Recovery Tax (OAS clawback) is based on individual income. The government does not consider your family income when calculating how much your OAS benefits should be clawed back.
When Does OAS Get Clawed Back?
Your OAS gets clawed back when your annual net world income exceeds $81,761. So for every $1 of your net income above $81,761, your maximum OAS pension amount is reduced by 15 cents (15%).
How To Calculate OAS Clawback
The Old Age Security Clawback amount is determined by your income and the threshold amount for the year. You would be charged 15% of the difference between your income and the annual threshold amount.
For example, if your income in 2022 was $101,000. With the threshold for 2023 to 2024 as $81,761. Your clawback amount would be:
$101,000 – $81,761 = 19,239
19,239 x 0.15 (15%) = 2,886
You would have to repay $2,886 to the government for July 2023 to June 2024.
What Income is Included in OAS Clawback?
All taxable incomes in Canada are included in your OAS clawback calculations, including:
- Canada Pension Plan
- Quebec Pension Plan
- Company pension
- RRSP income
- Old Age Security
- RRIF income
- Retirement annuity
- Your salary (if you’re still working).
10 Practical Ways To Minimise Your OAS Clawback
However, there are strategies you can implement to minimize your OAS clawback:
1. Pension Income Splitting
If you earn significantly more or less than your spouse or common-law partner, pension income splitting may benefit you both. OAS is an individual benefit; sharing taxable income can help one partner lower their income and reduce OAS clawbacks.
For example, if you are a high-net-worth individual with about $100,000 in eligible retirement income, your spouse earns about $42,000. You would be subject to OAS clawback unless you split pension income with your partner.
Pension income splitting will then allow you to reduce your family’s overall tax burden simply by moving your eligible pension income from you to your spouse, who is in a lower tax bracket.
To do this, you would “transfer” about $22,000 to him so that your bracket will fall to $78,000, while his income will increase to $64,000, which brings both of you below the OAS clawback threshold, allowing you to receive full OAS benefits.
Even though we used the word transfer, you’re not transferring your investments per se. You are splitting your income through a joint election on each spouse/common-law partner’s tax returns each year.
You would continue to receive your benefits and pension, but during the tax season, you can use Form T1032 to jointly elect how much of the pension income you are splitting.
However, not all income can be split. The following are eligible incomes that can be split:
- Lifetime annuity payments from an RPP, RRSP, DPSP, and Retirement Compensation Arrangement (RCA)
- Taxable foreign pensions
- Payments from an RRIF, LIF, LRIF, PRIF
- Interests from a non-Registered Life Annuity
- Interest from a Guaranteed Interest Annuity (GIA)
The following are incomes that cannot be split:
- Any foreign source pension income that is tax-free in Canada because of a tax treaty that entitles you to claim a deduction
- Income from a US IRA
- Old age security (OAS), Guaranteed income supplement (GIS)
- Canada Pension Plan (CPP), Quebec Pension Plan (QPP)
2. Prioritise TFSA
Tax-Free Savings Accounts (TFSA) are an excellent way to grow your money without paying taxes. Increasing your TFSA investments will help avoid OAS clawbacks if you haven’t reached your contribution limit.
TFSA investments will grow tax-free and can be withdrawn tax-free. This means that OAS clawbacks will not be triggered now or in the future.
As a new contribution room becomes available each year, you can move investments into your TFSA. Though you may face a high OAS clawback now, as you put money into your TFSA, you may reduce the clawback in the future.
Related: TFSA Contribution Limit & Withdrawal Rules for Canadians
3. Contribute to Your Spouse’s RRSP
If your spouse or common-law partner is younger than you, you can contribute to their Registered RRSP when you do not have any contribution room available in your RRSP. This will also help to lower your taxable income.
4. Defer OAS
You can reduce the risk of OAS clawback by deferring OAS until you reach the age of 70. This strategy is beneficial if your income level between the time you are 65 years and 70 years will push you into the income threshold of OAS clawback.
This strategy appears to be simple yet very efficient. In the immediate time, you will prevent OAS clawback; in the future, you can even potentially earn more money in OAS benefits.
This is true because every month you delay your OAS benefits, you get a 0.6% increase. Therefore, delaying your OAS benefits for five years until age 70 will increase your monthly payout by 36%.
But again, this strategy will only make sense if you expect to have a lot of income between 65 and 70 years.
5. Withdraw From Your RRSP Before 65
Suppose you have periods with low taxable income before you turn 65 and think your retirement income will still be higher than the OAS threshold amount after retirement. In that case, you may withdraw some of your money from the RRSP accounts.
Registered Retirement Savings Plan (RRSP) only defers taxes. At some point, you will have to pay those taxes when you want to withdraw.
Taking your money from the RRSP account now could lower your income when you start collecting your OAS benefit and may help to maximise the OAS benefit you qualify for.
This strategy is very tricky and should only be applied after professional advice. But if you are confident that this strategy is worth it for you, then you may withdraw part of your RRSP before starting OAS, and you can put the money into a TFSA to continue growing tax-free.
Related: Withholding Tax RRSP: How to Avoid Withdrawal Taxes (2024)
6. Leverage Your Investing
Borrowing your money out to investors to deduct the interest can be another strategy. It significantly reduces your net income, but leveraging comes with risk. Be careful.
Related: Best Ways to Invest Money in Canada For 2024
7. Use the Younger Spouse’s Age for RRIF
If you are 71 years of age and your spouse is way younger than you, you can use your spouse’s age to calculate your minimum RRIF payments. It lowers your net income and reduces your mandatory annual withdrawal requirements.
8. Contribute to Your RRSP After Retirement
Until you are 71, you can still contribute to your RRSP account if some contribution room is available. This strategy could benefit you if your income is higher at 65 to 70 years. Contributing to your RRSP can lower your net income for OAS calculations.
9. Evaluate The Income in Your Non-registered Account
Interests from GICs and some other savings are fully taxable. Be mindful of investing in interest-only investments. A considerable percentage of the income will be included in your income calculation and could take you over the OAS threshold.
10. Plan Large Capital Sales (Cottage, Vacation Home, Stocks, etc.)
Selling your significant capital assets is another approach to avoiding OAS clawbacks. Capital assets may include a cottage, a vacation home, or stocks. If sold after OAS has begun, this may result in more OAS clawbacks that could have been avoided.
When a sale triggers capital gains, it will increase the taxable income by half of the capital gain (this 50% is called the inclusion rate).
If OAS payments have started and income is above the clawback threshold, this rise in taxable income will also trigger OAS clawbacks.
Final Thoughts on OAS Clawback 2024
Your OAS benefit is free money from the Canadian government, so receiving it without worrying about OAS clawbacks would be great.
If you are looking for ways to reduce your taxable income after age 65 to come under the OAS threshold, the strategies in this article are a good start for you.
However, no two situations are the same; therefore, these strategies are not meant to be a one-size-fits-all solution. Don’t make any move without consulting a tax professional.
FAQs on OAS Clawback 2024
What is the threshold of OAS Clawback?
The current income threshold for OAS clawback is $81,761 for the 2022 income year.
Can you lose your OAS?
Yes. When your income exceeds $134,626, you may lose your OAS benefits.
Does income splitting affect OAS clawback?
Yes. Depending on the income level of your spouse, income splitting could decrease your OAS clawback, or it could, in fact, increase your OAS clawback.
When did OAS clawback start?
OAS clawback, or the repayment of OAS benefits, began in 1989.
